Managers of hedge funds, private equity and real estate funds will face a huge increase in the volume and detail of regulations to follow under the first pan-European rules put forward by the European Securities and Markets Authority.
The 500 pages of “technical advice” issued on Wednesday are Esma’s effort to fit the heavily politicised AIFMD – alternative investment fund managers directive – to the realities of the business. Three lines in the original directive on when assets are considered “lost” have become 10 pages.
“The sheer volume of it will make a huge difference in the way we operate,” said Jonathan Herbst, a partner at the law firm Norton Rose.
The package heralds the growing importance of Esma and other pan-European regulators. The AIFMD was the subject of prolonged wrangling and a series of compromises in Brussels, and the industry has been watching closely to see if the details live up to the deal.
“We have been encouraged by Esma’s diligent and professional approach,” said Karsten Langer, chairman of EVCA, a private equity group. “We are also encouraged by Esma’s acknowledgement of the need to tailor the rules of this broad-reaching directive to ensure it achieves policy goals without saddling the economy with red tape.”
Steven Maijoor, Esma chairman, said the nascent authority viewed the AIFMD technical advice as an important test.
“By increasing transparency for both investors and supervisors and helping tackle the potential build-up of systemic risk, the new rules will put in place a comprehensive and balanced regime for the alternative fund sector,” Mr Maijoor said.
Esma will have similar responsibilities for a series of European directives that could reshape the financial world, including Mifid II, the revision of the markets in Financial Instruments Directive, and forthcoming rules on market abuse.
In some ways the technical advice is better than the industry had hoped. A section requiring portfolio managers outside the EU to prove the “equivalence” of their regulatory regime has been dropped.
“This is an important improvement,” said Joanna Cound of BlackRock.
But another section appeared to require overseas managers to comply with Basel III capital rules, which do not have a lighter-touch version for investment managers as the draft EU rules do.
“It appears there are extra requirements for investment managers outside of the EU,” the lobbyist said. “They help us in one part and take away in another.”
Industry groups remain unhappy with rules for depositories, which determine when fund custodians are liable for losses of investor assets. The Alternative Investment Management Association estimates the rule could increase industry costs by $6bn, more than 1 per cent of annual returns.
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